New Challenges for Taiwan in the 2022 Post-Pandemic Economy

Taiwan this year experienced its steepest economic growth in more than a decade. But a slower pace is expected in 2022 due to the higher base, more normalized demand, and supply chain adjustments.

Despite semiconductor shortages, shipping logjams, energy price hikes, and the uneven distribution of coronavirus vaccines, the global economy in 2021 has bounced back at an impressive pace. The International Monetary Fund (IMF) is forecasting a robust growth rate of 6% for the year. 

It was also a year of solid performance for Taiwan. Unscathed by the kind of lockdowns that affected many other countries, Taiwan continued to benefit from the world’s increased demand for tech products to meet work-from-home and home-entertainment needs during the pandemic.

Major forecasting organizations expect Taiwan’s GDP to grow by 5.9% to 6.2% in 2021, with the most conservative estimate coming from the IMF and the more bullish prediction from Morgan Stanley. Overall, Taiwan’s strong economic performance in 2021 – its best since the 10.25% achieved in 2010 – was fueled mainly by brisk growth in the export sector and heavy investments in capital expenditures.

Export orders in October increased by 14.6% year-on-year to reach a record high US$59.1 billion. It was the 20th consecutive month of growth over the same month a year earlier.

The persistent vigorous demand for semiconductor chips has been a significant contributor to this trend. According to market research firm TrendForce, Taiwan is responsible for a staggering 63% share of the global semiconductor market. Its top chipmaker, the Taiwan Semiconductor Manufacturing Co. (TSMC), accounted for 54% of global revenue in the semiconductor foundry category in 2021.

Taiwan’s exports in the second half of 2021 also benefited from the rebound of traditional commodities associated with the recovering global economy. Apart from a handful of factories that temporarily suspended operations due to the island’s summer outbreak, Taiwan’s manufacturing activities were largely unaffected by COVID-19. The Directorate General of Budget, Accounting and Statistics (DGBAS) forecasts a growth rate of 18% in exports of goods and services in 2021.

Capital investment was another key growth driver for 2021, with DGBAS anticipating nearly 12% growth in real private fixed capital formation. Besides mounting investment due to the rising demand for semiconductors and the reshoring of overseas Taiwanese companies, this development was also driven by the 5G infrastructure buildout, the booming offshore wind sector, and the expanding fleet capacity of airline and container shipping companies.

But taking only the strong export performance into consideration creates a skewed view of the health of Taiwan’s economy. Liang Kuo-yuan, president of the Yuanta-Polaris Research Institute, notes that private consumption has continued to be low in Taiwan, indicating that the growth pattern is imbalanced.

The COVID-19 outbreak in May dampened the nascent recovery of private consumption, and social-distancing measures and travel restrictions have remained in force, suppressing activity in the retail and hospitality sectors.

DGBAS expects real private consumption to grow by a mere 1.36% this year, a significantly less optimistic estimate than its previous 2021 forecast of 4.04%, published in November last year. But Citibank Economist Adrienne Lui, in a written response to Taiwan Business TOPICS, noted that consumption is likely to pick up noticeably in 2022 as Taiwan’s society slowly opens again.

Another factor in Taiwan’s economic performance has been the strong appreciation in the New Taiwan Dollar, which traded at 28.2 to the U.S. dollar in the last quarter of 2020 and recently reached 27.8 to the dollar. Citing this trend as a concern for the Central Bank, which wishes to keep the currency stable to protect export competitiveness, Yuanta-Polaris’ Liang predicts the NTD will depreciate slightly next year.

“The relative advantage of the Taiwanese economy will not be as strong as we saw this year,” he says. “I project the value of the Taiwan dollar to be 28.4 on average next year, but we should remember that it’s still a strong number.”

Inflation concerns

Consumer prices have increased by more than 5% for several consecutive months in the U.S., and Europe has seen rises of over 3% – both largely attributed to hikes in housing prices, crude oil, and raw materials. Inflation is expected to continue to pose risks to the 2022 global economy to some extent, although most economists consider the recent price increases to be primarily transitory, reflecting a steep resurgence in demand. 

While Taiwan has benefited from rising international prices due to its reliance on exports, manufacturers may face pressure from rising production costs in 2022. More likely, the strong consumer demand of 2021 will diminish, gradually easing the pandemic-related bottlenecks in the supply chain, notes Grace Chung, a research fellow at the Taiwan Institute of Economic Research (TIER). Coupled with the high base of 2021, those factors will slow domestic inflation in most categories. TIER estimates that the consumer price index (CPI) will rise by just 1.52% in 2022, while DGBAS predicts an even lower 0.89%

In addition, TIER expects the production capacity of semiconductor fabs to continue to be tight, with related supply chains gradually increasing prices, leading to capacity expansion and inflated sales prices that will support Taiwan’s export performance in 2022.

Consequently, the manufacturing sector looks like the continued winner in 2022, though raw material prices are expected to continue to rise, Chung says.

For consumers, the cost of food and gasoline increased markedly towards the end of 2021, with large restaurant chains raising the prices on menus and smaller eateries following suit. “This is likely to make the public a bit nervous,” says Chung. “Although we have an increase in basic salary income, people might find that money is getting thinner.”

The China effect

Generally unaffected by political tensions, cross-Strait trade is expected to remain strong for the foreseeable future. Liang of Yuanta-Polaris notes that Taiwan continues to play an important part in providing intermediate goods to China. “As long as the global market needs Chinese final products, Taiwanese intermediate goods will continue to be in demand,” he says.

At the same time, more companies are hedging manufacturing risks due to the U.S.-China trade tensions and the pandemic, leading to a redirection of foreign direct investment (FDI) away from China. Largely because of its strong tech sector, Taiwan has been one of the main beneficiaries of this trend.

Taiwan’s reshoring campaign to attract production lines back from China has had a significant effect. According to a report by HSBC, programs initiated two years ago have attracted new investments of over NT$1.34 trillion and created over 110,000 job opportunities.

Liang notes that the financial sector is becoming increasingly wary about the Chinese market. Deyi Tan, Asia economist at Morgan Stanley is also watching out for the bear case scenario of a growth hard landing in China from property market deleveraging.

“China and Taiwan currently have very high trade engagements, so if we see disorderly growth slowdown in China, then perhaps Taiwan will be similarly impacted via trade linkages,” Tan says. Regardless, she adds that Morgan Stanley’s 2022 growth forecast for China remains high at around 5.5%, above the consensus level of 5.1%.

“The recent slowing of growth in China is mainly policy-induced, caused by decarbonization, power cuts, property market deleveraging and regulatory measures on big tech and education sectors,” she says. “But with growth now below-trend and that spilling over to the labor market, we think policymakers would want to better balance between providing growth support versus achieving longer-term structural goals.”

Morgan Stanley consequently expects China to experience counter-cyclical policy easing, creating a benign backdrop for Taiwan. Still, notes Tan, the risk remains of policy missteps that lead to growth “hard landing” in China, with repercussions cascading through to Taiwan.

Slower, but not low, growth

Next year will bring a new wave of challenges for the post-pandemic economy, including international inflationary pressures, normalization of monetary policies of major central banks, changes in U.S.-China relations, and a revamped global supply chain.

Major international forecasting organizations and financial institutions are predicting a slowing of the global economic and trade growth rates in 2022 compared to 2021, mainly due to the gradual fading of the effect of fiscal relief measures and the continued pressures faced by emerging economies. The IMF forecasts a fall in the global trade growth rate from 9.7% this year to 6.7% in 2022.

DGBAS expects Taiwan’s real GDP to grow by 3.69% in 2022, while Citi and Morgan Stanley are forecasting 3.8% growth and TIER 4.1%. The high base in 2021 is regarded as the main factor in the two percentage-point difference between 2021 and 2022. TIER additionally expects the growth rate of fixed capital formation next year to be 3.39%, drastically lower than the revised growth rate of 10.21% in 2021.

Although global tech demand is seen as moderating in 2022, Morgan Stanley’s Tan stresses that export demand growth will moderate but to a level that is still above-trend. “The secular [long-term] demand for tech will remain very favorable,” she says. “You may not buy another TV or washing machine anytime soon, but there’s still demand for tech coming from 5G, AI, cloud-computing, and policymakers’ push for smart cities and digitalization. Adding to that, some of the CapEx for data centers and tech companies has been delayed and is expected to pick up as we go into next year.”

For its part, HSBC expects Taiwan’s exports to remain firm on the back of recovering global demand, adding that semiconductor shipments will be supported by both cyclical and structural factors that drive demand.

TSMC alone has announced a US$100 billion CapEx plan for 2021-2023, mostly for implementation domestically. Additionally, it was recently disclosed that Apple plans to adopt TSMC’s 4-nanometer chip production technology to mass-produce its first in-house 5G modem chip by 2023, giving the chipmaker’s production a further boost.

Another favorable factor for Taiwan in 2022 is expected to be the strong projected growth in the U.S. economy. Although an economic reopening in the U.S. is expected to bring increased spending on services, Morgan Stanley’s Tan stresses that the absolute dollar amount spent on goods will not necessarily decline. “U.S. households continue to sit on excess household savings, which are yet to be deployed,” she says.

Predictions about next year, however, are partially clouded by a lack of clarity regarding Taiwan’s COVID-19 recovery plan. Globally, most countries have opted to gradually open borders and live with the virus, while Taiwan, Hong Kong, and China have maintained a conservative approach that, if sustained, will continue to impede the tourism and service sectors.

Taiwan’s divergent “COVID-19 strategy may make a substantial difference to economic performance as time goes by,” Citi’s Lui told TOPICS in an email. “If the ‘live with the virus’ strategy appears to be successful elsewhere, the pressure for Taiwan to relax its quarantine measures for international travelers will increase.”

Citing the service sector’s suffering from COVID-19 restrictions, Yuanta-Polaris’ Liang notes the effect on unemployment, which has remained above pre-pandemic levels despite some improvement beginning in Q3 this year. From a more optimistic perspective, Morgan Stanley’s Tan refers to data showing that increased vaccination rates tend to unlock momentum for domestic demand. “By 2022, we expect a situation where [global] growth recovery will broaden out from exports to domestic demand,” she says. “That’s something we expect to see in Taiwan as well.”

HSBC points to another positive factor in boosting consumer demand: the government’s fiscal support in the form of vouchers distributed to the public worth NT$5,000, which can be spent until April 2022. TIER’s Chung, however, stresses that thus far the vouchers have not significantly impacted domestic spending.

More influential on domestic spending was the decision in October by the Minimum Wage Review Committee, a body established by the Ministry of Labor (MOL), to raise the minimum monthly and hourly wage by roughly 5% from January 2021. Later that month, the Executive Yuan approved a 4% wage hike for civil servants that will also take effect at the beginning of next year.

Economists agree that the raises, which are expected to benefit around 2.45 million and 1.05 million workers, respectively, will increase average wages and domestic demand. Although higher salaries could suppress business activities, the analysts expressed confidence in the private sector’s ability to handle the raises, thanks to recent increases in Taiwan’s share of global exports, as well as CapEx investments.

In TIER’s view, an expected increase in household disposable income due to rising salaries, coupled with a low base period in 2021, is likely to drive a rebound in private consumption next year. Foreseeing 5.03% growth in private consumption next year, TIER notes that “private consumption will be the main driving force for Taiwan’s economic growth in 2022.”

In the long term, Taiwan will need to tackle its talent and electricity shortages to maintain its production leverage. Citi’s Lui stresses that a stable electricity supply will be critical for further expansion in the tech sector.

“The transition to Taiwan’s green commitments and denuclearization process, as well as the smooth switching to LNG (liquefied natural gas) and IPP (independent power-producing) electricity generation, will need to be handled with care to avoid any disruption to the industry,” she told TOPICS.

Taiwan’s decreasing birth rate and brain drain are also creating a demographic headache. The supply of relevant talent has not kept pace with the creation of new high-skilled jobs. 

“During the pandemic, we have seen more and more people returning to Taiwan,” says Morgan Stanley’s Tan. “This could mitigate talent shortages in the near term, but Taiwan’s demographic trends are not favorable, and this will remain a challenge in the future. If Taiwan wants to maintain its global export share, it will have to be in something that’s not as labor-intensive, and a has bit higher value.”

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